Philippines prepares to get hit by “economic bomb” in Middle East

Philippine President Benigno Aquino III held an emergency meeting with cabinet members and officials of the country’s Department of Foreign Affairs on January 6 as concerns mount in Manila over the safety of Overseas Filipino Workers (OFWs) in the Middle East and the effect of the rising tensions between Saudi Arabia and Iran and the drop in oil prices on Filipino employment in the region and their remittances which form an important part of the country’s foreign currency income.

Currently, about 2.5 million Filipinos are working in the Middle East, mainly as construction workers, engineers, nurses and domestic helpers. Saudi Arabia alone is hosting around 1.2 million of them, while there are 850,000 in the UAE, around 200,000 each in Qatar and Kuwait, 72,000 in Bahrain, 55,000 in Oman and at least some 4,000 in Iran, according to data from the Philippine Overseas Employment Administration.

Together, they makes about one fourth of the total overseas Filipino workforce globally and also contributes about $6 billion of the total remittances from OFWs back home of a total of about $26 billion in 2015, which makes up nearly 10 per cent of Philippine GDP.

The big issue is that Saudi Arabia – which hosts the largest part of OFWs in the Middle East – is literally running out of money in the wake of dropping oil prices, a situation that observers already dubbed “economic bomb” for the country. The cash crunch is so dire that the Saudi government just hiked the price of gasoline by 50 per cent and will cut other subsidies on energy, water and scale back spending on roads, buildings and other infrastructure which will lead to sizeable job cuts for overseas workers. There are also plans to introduce income tax and/or sales tax which would directly and indirectly affect salaries.

And it could even get worse. The International Monetary Fund predicted that Saudi Arabia could run out of cash in five years or less if oil stays below $50 a barrel. This also might explain the reported plan to list a part of the country’s largest state-owned company and biggest oil corporation in the world, Saudi Aramco, at the stock exchange in Riyadh later this year, to bring in some much-needed cash for the government.

The situation in other countries in the Gulf Cooperation Council (GCC) is also bleak after the price of oil crashed from over $100 a barrel in 2014 to around $36 currently and most experts don’t expect a rebound anytime soon.

The UAE, hosting the second biggest number of OFWs, has already announced that it plans to introduce both a federal sales tax – or value-added tax (VAT) – and a corporation tax in the near future which would have a negative effect on employment opportunities and purchasing power in the country.

All this could lead to a further drop in the employment of Filipinos in the GCC countries, and thus adversely affect the Philippine economy in general, should the situation persist or even worsen, experts warn.

“2016 is a very uncertain year. Definitely, the Philippine economy and the labour market will be adversely affected by all these developments,” Dr. Rene Ofroneo, OFW expert at the University of the Philippines’ School of Labour and Industrial Relations, told Filipino news broadcaster GMA Network

The Philippine Department of Foreign Affairs said it is “monitoring the situation very closely.”

“Our embassies are prepared to assist our OFWs under any contingency,” the department’s spokesman Charles Jose said in a statement issued on January 5. He emphasized that the Philippine government had already demonstrated to be capable of successfully repatriating thousands of OFWs from Libya, Iraq, Syria and Yemen during crises in recent years.

Measures would also include ensuring that alternative jobs are in place for those OFWs who may lose their employment, Jose added. The government said it has “already anticipated the necessity of such support” because of the decline of oil revenues.

While the Philippine Overseas Employment Administration still believes that 2016 will bring with it a small growth of OFW remittances despite all the woes, some economists are not so sure about that and feel that record-high remittances might become a thing of the past. This is because adding to low oil prices and regional conflicts is the rise of the US dollar valuation as a result of the gradual lifting of interest rates by the US Federal Reserve, which automatically puts pressure on other major global currencies which OFWs are remitting back home, such as the Japanese yen, the Australian dollar or the euro. Those currencies have all weakened sharply in recent months, including against the Philippine peso, factually devaluating foreign exchange sent home by OFWs, according to Jun Trinidad, country economist for the Philippines of Citigroup.

In fact, the negative trend already became apparent last year when, for the first time since 2003, OFW remittances dropped in absolute value terms by 0.6% per cent in the month of August, according to a surprise announcement by the Philippine central bank back then. Under the current circumstances, more such announcements are likely to follow, and this slowdown in combination with a continuous drop in foreign direct investments to the Philippines, weak exports, the worsening impact of weather phenomena on the agriculture sector and a looming power crisis cut put the Philippine economy to the test in a crucial election year.

Philippine President Benigno Aquino III held an emergency meeting with cabinet members and officials of the country’s Department of Foreign Affairs on January 6 as concerns mount in Manila over the safety of Overseas Filipino Workers (OFWs) in the Middle East and the effect of the rising tensions between Saudi Arabia and Iran and the drop in oil prices on Filipino employment in the region and their remittances which form an important part of the country’s foreign currency income.

Currently, about 2.5 million Filipinos are working in the Middle East, mainly as construction workers, engineers, nurses and domestic helpers. Saudi Arabia alone is hosting around 1.2 million of them, while there are 850,000 in the UAE, around 200,000 each in Qatar and Kuwait, 72,000 in Bahrain, 55,000 in Oman and at least some 4,000 in Iran, according to data from the Philippine Overseas Employment Administration.

Together, they makes about one fourth of the total overseas Filipino workforce globally and also contributes about $6 billion of the total remittances from OFWs back home of a total of about $26 billion in 2015, which makes up nearly 10 per cent of Philippine GDP.

The big issue is that Saudi Arabia – which hosts the largest part of OFWs in the Middle East – is literally running out of money in the wake of dropping oil prices, a situation that observers already dubbed “economic bomb” for the country. The cash crunch is so dire that the Saudi government just hiked the price of gasoline by 50 per cent and will cut other subsidies on energy, water and scale back spending on roads, buildings and other infrastructure which will lead to sizeable job cuts for overseas workers. There are also plans to introduce income tax and/or sales tax which would directly and indirectly affect salaries.

And it could even get worse. The International Monetary Fund predicted that Saudi Arabia could run out of cash in five years or less if oil stays below $50 a barrel. This also might explain the reported plan to list a part of the country’s largest state-owned company and biggest oil corporation in the world, Saudi Aramco, at the stock exchange in Riyadh later this year, to bring in some much-needed cash for the government.

The situation in other countries in the Gulf Cooperation Council (GCC) is also bleak after the price of oil crashed from over $100 a barrel in 2014 to around $36 currently and most experts don’t expect a rebound anytime soon.

The UAE, hosting the second biggest number of OFWs, has already announced that it plans to introduce both a federal sales tax – or value-added tax (VAT) – and a corporation tax in the near future which would have a negative effect on employment opportunities and purchasing power in the country.

All this could lead to a further drop in the employment of Filipinos in the GCC countries, and thus adversely affect the Philippine economy in general, should the situation persist or even worsen, experts warn.

“2016 is a very uncertain year. Definitely, the Philippine economy and the labour market will be adversely affected by all these developments,” Dr. Rene Ofroneo, OFW expert at the University of the Philippines’ School of Labour and Industrial Relations, told Filipino news broadcaster GMA Network

The Philippine Department of Foreign Affairs said it is “monitoring the situation very closely.”

“Our embassies are prepared to assist our OFWs under any contingency,” the department’s spokesman Charles Jose said in a statement issued on January 5. He emphasized that the Philippine government had already demonstrated to be capable of successfully repatriating thousands of OFWs from Libya, Iraq, Syria and Yemen during crises in recent years.

Measures would also include ensuring that alternative jobs are in place for those OFWs who may lose their employment, Jose added. The government said it has “already anticipated the necessity of such support” because of the decline of oil revenues.

While the Philippine Overseas Employment Administration still believes that 2016 will bring with it a small growth of OFW remittances despite all the woes, some economists are not so sure about that and feel that record-high remittances might become a thing of the past. This is because adding to low oil prices and regional conflicts is the rise of the US dollar valuation as a result of the gradual lifting of interest rates by the US Federal Reserve, which automatically puts pressure on other major global currencies which OFWs are remitting back home, such as the Japanese yen, the Australian dollar or the euro. Those currencies have all weakened sharply in recent months, including against the Philippine peso, factually devaluating foreign exchange sent home by OFWs, according to Jun Trinidad, country economist for the Philippines of Citigroup.

In fact, the negative trend already became apparent last year when, for the first time since 2003, OFW remittances dropped in absolute value terms by 0.6% per cent in the month of August, according to a surprise announcement by the Philippine central bank back then. Under the current circumstances, more such announcements are likely to follow, and this slowdown in combination with a continuous drop in foreign direct investments to the Philippines, weak exports, the worsening impact of weather phenomena on the agriculture sector and a looming power crisis cut put the Philippine economy to the test in a crucial election year.